SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File Number 1-12744
MARTIN MARIETTA MATERIALS, INC.(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code 919-781-4550
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the Quarter Ended March 31, 2003
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PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS
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MARTINS MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSFirst Quarter Ended March 31, 2003 and 2002
OVERVIEW Martin Marietta Materials, Inc. (the “Corporation”), operates in two principal business segments: aggregates products and magnesia-based products. The Corporation’s net sales and earnings are predominately derived from its aggregates segment, which processes and sells granite, limestone, and other aggregates products from a network of approximately 360 quarries, distribution facilities and plants in 28 states in the southeastern, southwestern, midwestern and central regions of the United States and in the Bahamas and Canada. The division’s products are used primarily by commercial customers principally in domestic construction of highways and other infrastructure projects and for commercial and residential buildings. The magnesia-based products segment produces magnesia-based chemicals products used in industrial, agricultural and environmental applications, and dolomitic lime sold primarily to customers in the steel industry.
CRITICAL ACCOUNTING POLICIES The Corporation outlined its critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003.
Effective January 1, 2003, the Corporation adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“FAS 143”). This pronouncement requires recognition of a liability that represents an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. A corresponding amount is capitalized as part of the fixed asset. FAS 143 is limited to obligations that are legally enforceable, whether due to law or statute, an oral or written contract, or under the doctrine of promissory estoppel. The Corporation, through its Aggregates segment, incurs reclamation obligations at most of its quarries.
The selection of asset retirement obligations as a critical accounting policy is due to the significant assumptions and estimates made by management in determining the asset retirement liability and the cumulative effect of the change in accounting principle. Further, the adoption of FAS 143 will result in additional depreciation expense and accretion expense annually.
The significant assumptions and estimates required in the adoption of FAS 143 include the following:
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSFirst Quarter Ended March 31, 2003 and 2002(Continued)
Using these estimates and assumptions, the cumulative effect of the change in accounting principle, fixed asset, accumulated depreciation and the asset retirement obligation were calculated for each of the Corporation’s locations that have an asset retirement obligation. At January 1, 2003, the following amounts were recorded in connection with the adoption of FAS 143:
Subsequent to the adoption of FAS 143, the Corporation will recognize annual depreciation expense, currently estimated at approximately $0.6 million, related to the fixed assets. Further, the Corporation will recognize annual accretion expense, currently estimated at approximately $1.0 million, as the asset retirement obligation is accreted to its future value. The assumptions and estimates related to FAS 143 will be updated as facts and circumstances change. Any changes will affect annual depreciation and accretion expenses.
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RESULTS OF OPERATIONS Consolidated net sales for the quarter were $283.1 million compared to 2002 first quarter net sales of $282.3 million. Consolidated operating loss for the quarter was $9.5 million as compared to $0.3 million in the first quarter 2002. Interest expense decreased 9% to $10.1 million for the first quarter 2003. Consolidated loss from continuing operations before the cumulative effect of a change in accounting principle for the quarter was $13.1 million, or $0.27 per diluted share, compared to $7.7 million, or $0.16 per diluted share, in the first quarter 2002.
In 2002 and 2003, the Corporation divested of certain nonstrategic operations within its Aggregates operating segment with the 2003 divestitures being uncertain as of December 31, 2002. As such, the Corporation had a continuing financial interest in this certain group of assets and the related market served by these operations during 2002 and through the 2003 date of disposal. For the first quarter 2003, the divestiture resulted in discontinued operations and therefore the results of all operations through the date of disposal and any gain or loss on disposals are included in “Loss from discontinued operations” on the consolidated statement of earnings. The results of discontinued operations during the quarter ended March 31, 2002 have been reclassified, as required, to conform to the 2003 presentation. The discontinued operations included net sales of $0.2 million and $7.7 million and a pretax loss of $1.5 million and $4.7 million for the quarter ended March 31 in 2003 and 2002, both respectively. The pretax loss included a loss on disposal of $0.4 million for the quarter ended March 31, 2003. No disposals occurred during the quarter ended March 31, 2002. The loss from discontinued operations was $0.9 million, or $0.02 per diluted share, and $2.8 million, or $0.06 per diluted share, during the first quarter of 2003 and 2002, respectively.
During the first quarter 2003, the Corporation recorded a $6.9 million, or $0.14 per diluted share, net charge as the cumulative effect of an accounting change related to the adoption of FAS 143. The first quarter of 2002 was restated to reflect the $11.5 million, or $0.23 per diluted share, charge recorded as the cumulative effect of an accounting change related to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. The consolidated net loss for the first quarter was $20.9 million, or $0.43 per diluted share, in 2003 as compared to $22.1 million, or $0.45 per diluted share, in 2002.
Except as indicated, the following comparative analysis in the Results of Operations section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on results from continuing operations.
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Net sales for the Aggregates division were $263.2 million for the first quarter 2003 compared to $263.5 million for the first quarter 2002. Average sales price at heritage aggregates operations increased 3.3 percent, which was positively influenced by the mix of products sold. Price increases were offset by an approximately 6 percent decline in heritage aggregates shipments, most significantly in the Southwest and Southeast. Heritage aggregates production volume for the first quarter of 2003 declined over 5.3 million tons, or 13 percent, as compared to 2002, primarily due to the poor weather conditions coupled with inventory control. Cost of sales was negatively affected by a sharp escalation in energy costs. Diesel fuel, which is used primarily to operate trucks and loaders in quarry production, increased by 68% on an average per gallon basis as compared to the prior year quarter. Gross margin for the division was 7.6 percent in 2003 compared with 9.5 percent in the year-earlier period.
The following tables present volume and pricing data and shipments data for heritage operations, acquisitions and discontinued operations:
Selling, general and administrative expenses as a percentage of net sales for the Aggregates division increased primarily due to increased benefits costs and higher costs related to the Corporation’s information systems. The Aggregates division’s loss from operations was $9.4 million in the first quarter of 2003 as compared to $1.7 million in the first quarter of 2002.
The Aggregates division’s business is significantly affected by seasonal changes and other weather-related conditions. Consequently, the Aggregates division’s production and shipment levels coincide with general construction activity levels, most of which occur in the division’s markets typically during the spring, summer, and fall seasons. Further because of the potentially significant impact of weather on the Corporation’s operations, first quarter results are not indicative of expected performance for the year.
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Magnesia Specialties’ first quarter net sales of $19.9 million increased 6% when compared to the year-earlier period. The loss from operations for the first quarter was $0.1 million for 2003 as compared to earnings from operations of $1.5 million in 2002, primarily as a result of higher energy costs related to natural gas.
The following tables present net sales, gross profit, selling, general and administrative expenses, and earnings from operations data for the Corporation and each of its divisions for the three months ended March 31, 2003 and 2002. In each case, the data is stated as a percentage of net sales, of the Corporation or the relevant division, as the case may be. Earnings from operations include research and development expense and other operating income and expenses.
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Other nonoperating income and expenses, net, for the quarter ended March 31, was $0.6 million in income in 2003 compared with $0.2 million in income in 2002. In addition to other offsetting amounts, other income and expenses, net, is comprised generally of interest income, gains and losses related to certain amounts receivable, costs associated with the commercialization of certain new technologies and net equity earnings from nonconsolidated investments.
Interest expense was $10.1 million in the first quarter 2003, compared to $11.1 million in the first quarter of 2002, primarily due to lower average outstanding debt and the impact of interest rate swaps.
LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities during the three months ended March 31, 2003 was $19.6 million compared with $19.4 million in the comparable period of 2002. The cash flow for both 2003 and 2002 was principally from earnings, before deducting depreciation, depletion and amortization, offset by working capital requirements. Depreciation, depletion and amortization was as follows (amounts in millions):
The seasonal nature of the construction aggregates business impacts quarterly net cash provided by operating activities when compared with the year. Full year 2002 net cash provided by operating activities was $203.6 million, compared with $19.4 million provided by operations in the first quarter of 2002.
First quarter capital expenditures, exclusive of acquisitions, were $28.0 million in 2003 and $28.1 million in 2002. Comparable full-year capital expenditures were $152.7 million in 2002.
In 2003, the Corporation entered into new equipment operating leases with aggregate future commitments of $11.7 million. The Corporation intends to continue entering into operating leases, primarily for mobile equipment, in its ordinary course of business. The Corporation also enters into equipment rentals on a regular basis to meet shorter term, nonrecurring and intermittent needs.
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The Corporation declared a $0.03 per share increase in its regular quarterly dividend to $0.18 per share effective for the dividend payable on June 30, 2003. The increased dividend on an annual basis is $0.72 per share and is expected to require additional cash of $6 million on an annual basis at the current level of outstanding common shares.
The Corporation continues to rely upon internally generated funds and access to capital markets, including its revolving credit agreement and a cash management facility, to meet its liquidity requirements, finance its operations and fund its capital requirements.
With respect to the Corporation’s ability to access the public market, management’s authority to file a universal shelf registration statement with the Securities and Exchange Commission for up to $500 million expired by its own terms.
Based on prior performance and current expectations, the Corporation’s management believes that cash flows from internally generated funds and its access to capital markets are expected to continue to be sufficient to provide the capital resources necessary to fund the operating needs of its existing businesses, cover debt service requirements, and allow for payment of dividends in 2003.
The Corporation may be required to obtain additional levels of financing in order to fund certain strategic acquisitions, if any such opportunities arise. Currently, the Corporation’s senior unsecured debt is rated “A-” by Standard & Poor’s and “A3” by Moody’s. The Corporation’s commercial paper obligations are rated “A-2” by Standard & Poor’s and “P-2” by Moody’s. In July 2001, Standard and Poor’s revised its outlook for the Corporation to negative from stable while reaffirming its ratings. The outlook revision reflects Standard & Poor’s belief that the Corporation’s acquisition activity could make it more difficult to restore its credit ratios to certain levels. While management believes its credit ratings will remain at an investment-grade level, no assurance can be given that these ratings will remain at the above-mentioned levels.
ACCOUNTING CHANGES The accounting changes that currently impact the Corporation are included in Notes 8 and 9 to the Consolidated Financial Statements.
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OUTLOOK 2003 The outlook for 2003 remains uncertain. Management continues to focus on productivity improvements and overhead reductions, which are necessary to maximize profitability. However, the duration of the soft economy, with its impact particularly on infrastructure and commercial construction markets, coupled with the absorption of fixed costs as they affect operations, is the primary driver of uncertainty. The impact of budget deficits on states’ road spending and the volatility of energy prices also continues to be a significant concern. On a positive note, many of the Corporation’s major customers indicate strong work backlogs despite the soft economy. The customer’s backlogs are influenced by the accumulation of work deferred from as far back as October 2002 because of poor weather conditions in many of the Corporation’s market areas. The timing of these deferred shipments is subject to various events, including customer project schedules and weather. Further, higher-than-anticipated TEA-21 funding levels could have a positive influence on 2003 results in the second half of the year.
Given management’s current assessment of economic and operating factors, net earnings for full year 2003 are expected to fall in the range of $1.85 to $2.20 per diluted share, excluding the cumulative effect of adopting FAS 143. For the second quarter 2003, management expects net earnings to be in the range of $0.70 to $0.80 per diluted share. Management continues to believe that the downside risks outweigh the upside potential. Capital expenditures are expected to be approximately $140 million in 2003, exclusive of acquisitions.
The Corporation outlined the risks associated with its aggregates operations in its Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003. Management continues to evaluate its exposure to all operating risks on an ongoing basis. However, due to current general economic conditions, adverse exposure to certain operating risks is heightened, including the ability of state and local governments to fund construction and maintenance. Also, current levels of commercial and residential construction activity may be more negatively affected, if the general economic downturn continues or deteriorates.
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OTHER MATTERS Investors are cautioned that all statements in this Quarterly Report on Form 10-Q that relate to the future involve risks and uncertainties, and are based on assumptions that the Corporation believes in good faith are reasonable but which may be materially different from actual results. Factors that the Corporation currently believes could cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to business and economic conditions and trends in the markets the Corporation serves; the level and timing of federal and state transportation funding; levels of construction spending in the markets the Corporation serves; unfavorable weather conditions; ability to recognize increased sales and quantifiable savings from internal expansion projects; ability to successfully integrate acquisitions quickly and in a cost-effective manner and achieve anticipated profitability; fuel costs; transportation costs; competition from new or existing competitors; successful development and implementation of the structural composite technological process and strategic products for specific market segments; unanticipated costs or other adverse effects associated with structural composite revenue levels, product pricing, and cost associated with manufacturing ramp-up; the financial strength of the structural composite customers and suppliers; business and economic conditions and trends in the trucking and composites industries in various geographic regions; possible disruption in commercial activities related to terrorist activity and armed conflict, such as reduced end-user purchases relative to expectations; and the timing and occurrence of events that may be subject to circumstances beyond the Company’s control. Investors are also cautioned that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. These forward-looking statements are made as of the date hereof based on management’s current expectations, and the Corporation does not undertake an obligation to update such statements, whether as a result of new information, future events, or otherwise.
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INVESTOR ACCESS TO COMPANY FILINGS Shareholders may obtain, without charge, a copy of Martin Marietta Materials’ Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2002, by writing to:
Additionally, Martin Marietta Materials’ Annual Report, press releases and filings with the Securities and Exchange Commission, including Forms 10-K, 10-Q, 8-K and 11-K, can generally be accessed via the Corporation’s Web site. Filings with the Securities and Exchange Commission accessed via the Web site are available through a link with the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. Accordingly, access to such filings is available upon EDGAR placing the related document in its database. Investor relations contact information is as follows:
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation’s operations are highly dependent upon the interest rate-sensitive construction and steelmaking industries. Consequently, these marketplaces could experience lower levels of economic activity in an environment of rising interest rates or escalating costs. Aside from these inherent risks from within its operations, the Corporation’s earnings are affected also by changes in short-term interest rates, as a result of its temporary cash investments, including overnight investments in Eurodollars; interest rate swaps; outstanding commercial paper obligations; and defined benefit pension plans.
Interest Rate Swaps. In May 2002, the Corporation entered into interest rate swap agreements (the “Swaps”) for interest related to $100 million of the $200 million Notes due in 2008 to increase the percentage of its long-term debt that bears interest at a variable rate. The Swaps are fair value hedges designed to hedge against changes in the fair value of the Notes due to changes in LIBOR, the designated benchmark interest rate. The terms of the Swaps include the Corporation receiving a fixed annual interest rate of 5.875% and paying a variable annual interest rate based on six-month LIBOR plus an average of 0.235%.
The Corporation is required to record the fair value of the Swaps and the change in the fair value of the related Notes in its consolidated balance sheet. In accordance with Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities, no gain or loss is recorded for the changes in fair values. At March 31, 2003, the fair market value of the Swaps is $9.8 million.
As a result of the Swaps, the Corporation has increased interest rate risk associated with changes in the LIBOR rate. The hypothetical change in interest rates of 1% would change annual interest expense by $1 million and also change the fair market value of the debt covered by the Swaps by approximately $6 million.
Commercial Paper Obligations. The Corporation has a $275 million commercial paper program in which borrowings bear interest at a variable rate based on LIBOR. At March 31, 2003, there were outstanding commercial paper borrowings of $45 million. Due to the borrowings bearing interest at a variable rate, the Corporation has interest rate risk. The effect of a hypothetical increase in interest rates of 1% on borrowings of $45 million would be an increase of $450,000 in interest expense on an annual basis.
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Pension Expense. The Corporation sponsors noncontributory defined benefit pension plans which cover substantially all employees. Therefore, the Corporation’s results of operations are affected by its pension expense. Assumptions that affect this expense include the discount rate and the expected long-term rate of return on assets. The selection of the discount rate is based on the yields on high quality, fixed income investments. The selection of the expected long-term rate of return on assets is based on general market conditions and related returns on a portfolio of investments. Therefore, the Corporation has interest rate risk associated with these factors. The impact of hypothetical changes in these assumptions on the Corporation’s annual pension expense is discussed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003.
Aggregate Interest Rate Risk. The pension expense for 2003 is calculated based on assumptions selected at December 31, 2002. Therefore, interest rate risk in 2003 is limited to the potential effect related to the interest rate swaps and outstanding commercial paper. Assuming outstanding commercial paper borrowings of $45 million and including the impact related to the Swaps, the aggregate effect of a hypothetical 1% increase in interest rates would increase interest expense and decrease pretax earnings by $1.45 million.
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Item 4. CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2003. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to March 31, 2003.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Part I. Item 3. Legal Proceedings of the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the year ended December 31, 2002.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the first quarter of 2003.
Item 5. Other Information.
On January 28, 2003, the Corporation announced that it will release its financial results for the fourth quarter and full year ended December 31, 2002 on January 30, 2003.
On January 30, 2003, the Corporation reported its financial results for the fourth quarter and full year ended December 31, 2002.
On January 30, 2003, the Corporation announced that the Board of Directors had declared a regular quarterly cash dividend of $0.15 per share of the Corporation’s common stock. The dividend, which represents a cash dividend of $0.60 per share on an annualized basis, was payable March 31, 2003, to shareholders of record at the close of business on February 28, 2003.
On February 25, 2003, the Corporation announced that its management will make a presentation to analyst and portfolio managers at The Wall Street Analyst Forum’s Institutional Investor Conference in New York on March 4, 2003.
On March 6, 2003, the Corporation announced that its management will make a presentation to analyst and portfolio managers at Salomon Smith Barney’s 16th Annual Global Industrial Manufacturing Conference in New York on March 11, 2003.
On March 26, 2003, the Corporation announced that the Board of Directors had declared a $0.03 per share increase in the regular quarterly cash dividend to $0.18 per share on the Corporation’s common stock. The dividend, which represents a cash dividend of $0.72 per share on annualized basis, is payable June 30, 2003, to shareholders of record at the close of business on June 3, 2003.
On April 16, 2003, the Corporation announced earnings guidance for the first quarter ended March 31, 2003.
On April 29, 2003, the Corporation reported financial results for the first quarter ended March 31, 2003.
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PART II — OTHER INFORMATION(Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, the Corporation filed the following current reports on Form 8-K:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Stephen P. Zelnak, Jr., Chief Executive Officer, certify that:
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I, Janice K. Henry, Chief Financial Officer, certify that:
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the quarter ended March 31, 2003
EXHIBIT INDEX
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